Determinants of the Demand for Political Risk Insurance: Evidence from an International Survey

Abstract

The exposure of corporations to political risks has increased in the past years, mainly driven by globalization and the outsourcing of production to emerging markets. One way to address these new challenges is Political Risk Insurance (PRI), which, however, has attracted little scholarly interest to date. We address this research gap by identifying the major determinants of the demand for PRI. To this end, we developed an extensive questionnaire and distributed it among insurance managers in Central Europe. Our empirical analysis builds on Exploratory Factor Analysis and Logistic Regression. We are able to show that a company’s propensity to purchase PRI increases with its perceived exposure to political risks, its perceived experience and expertise with the instrument, as well as the perceived adequacy of the contract’s price. Other factors, such as the size of the firm, the perceived importance of its risk management department or the perceived availability of information on PRI, do not seem to play a significant role.